The Earnings Outlook for U.S. Exchanges

FOLLOWING A DETAILED REVIEW of primary performance metrics for the U.S. exchanges we have tweaked our second-quarter 2010 estimates for the group. Relative to our previous expectations, our second-quarter 2010 earnings-per-share estimate for
CME Group
(ticker: CME) comes up 2% on higher-than-expected volumes and slightly better blended pricing. We are reducing our estimates for
IntercontinentalExchange
(ICE),
Nasdaq OMX Group
(NDAQ) (Nord Pool) and
NYSE Euronext
(NYX).

While we are lowering our estimates for the exchanges on balance, our estimate revisions should not take away from our expectations for a very strong quarter for the group. We expect all exchanges to post solid earnings growth on both a year-over-year and sequential basis, driven in particular by volatility-induced volume strength in May.

Following record volumes in second-quarter 2010, activity levels in the current quarter have slowed meaningfully. Volumes for major markets and asset classes are down about 20% from the prior quarter with some markets even posting greater declines. ICE is the only exchange that is running ahead of our expectations on balance so far this quarter.

Total ADV of 13.5 million contracts came in slightly (0.7%) ahead of our original estimate of 13.4 million. The delta was primarily driven by higher equities volume (3.45 million versus 3.10 million), which was partially offset by lower activity in the interest rate complex (6.07 million versus 6.40 million).

We are raising our rate per contract (RPC) assumption by 0.3% from 79.1 cents to 79.4 cents. Our updated RPC forecast is based on observed pricing through May (78.9 cents), changing product mix (a lower contribution of low-fee interest rate products), and our expectations for June pricing by product. Our new estimate compares to RPC of 82.1 cents in the prior quarter.

We are lowering our second-quarter 2010 EPS estimate for ICE by four cents from $1.46 to $1.42. While futures volumes overall were modestly higher than our expectations for the quarter, lower pricing should represent a drag on the top line.

ADV across ICE's various futures businesses of 1.392 million contracts came in slightly higher than the 1.370 million we had previously modeled. Relative to our previous forecast, ICE Futures Europe volumes underperformed slightly (916,000 versus 923,000), which was more than offset by ICE Futures U.S. (458,000 versus 431,000).

Within ICE U.S., financial products drove the majority of the delta. Pricing was a mixed bag in the second quarter. While agricultural pricing in the U.S. was much better than expected this was offset by a lower RPC in the U.S. financials business and in Europe.

Other incremental disclosures in ICE's second-quarter 2010 volume release related to the company's over-the-counter (OTC) energy and credit businesses. In the energy business, ICE reported record daily commissions of $1.43 million versus our $1.41 million estimate. The $1.43 million was in line with the latest "live" estimate of our proprietary model for that business. We believe the 4% sequential increase in daily commissions was driven by both established businesses (natural gas and power) in particular on the heels of increasing natural-gas prices toward the end of the quarter. We also believe that "newer" businesses, such as OTC oil, contributed to the record results.

Following NYSE Euronext's official volume release last week, which included several new pricing disclosures, we are lowering our second-quarter 2010 EPS estimate from 64 cents to 58 cents. The primary driver of our estimate reduction is the European derivatives business, where volumes slowed significantly in June. Lower pricing across all businesses also contributed to our reduced estimate.

Lower-than-expected Liffe Europe volumes drove the largest portion of our estimate reduction as aforementioned. ADV for traditional products came in 7% below our prior estimate for second-quarter 2010 (3.98 million contracts versus 4.29 million). Lower pricing (63-cent per contract as per new company disclosure) compounded the weaker volume results, driving segment revenues down to an estimated $158 million for the quarter (down 9% versus our prior estimate of $174 million). Our previous RPC forecast for the quarter was 65 cents.

Volume for all other businesses (U.S. cash/derivatives and European cash) finished the quarter above expectations, with U.S. cash (up 10%) standing out the most on the positive side. That said, we have lowered our pricing assumptions in all businesses to account for new company disclosures, which resulted in lower expectations for net revenues in both U.S. derivatives and European cash.

Following a detailed review of Nasdaq OMX's primary performance metrics, we are lowering our second-quarter 2010 EPS forecast to 50 cents from 52 cents. The primary driver of our estimate reduction was the European derivatives business on the heels of lower-than- expected Nord Pool [Nordic Power Exchange] power volumes.

Volumes in Nasdaq OMX's other businesses were essentially in line with expectation, although we note that U.S. cash equities matched ADV finished the quarter almost 6% ahead of our expectations. Our pricing assumptions are largely unchanged from previous estimates.

-- Alex Kramm

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